Alimony in Texas Divorce Cases – An Update
Last year, I wrote a piece dispelling the myth that “there is no alimony in Texas.” The specific term alimony was always a construct of federal tax law. The relevant points in the taxation context to remember about post-divorce alimony – (a) there was a monthly payment from one ex-spouse to another for a specific period of time; (b) the ex-spouse paying the alimony was able to deduct those amounts from annual income and not pay taxes on that amount; and (c) the ex-spouse receiving the alimony was required to include those payments in annual income and pay taxes on that amount. “Was” is a key word here because federal law regarding alimony payments changed effective January 1, 2019.
So what changed? Beginning in 2019, the tax-shifting provisions were removed from the federal tax code. This means that now, after divorce the ex-spouse paying the alimony must pay taxes on that money at his (or her) tax rate. And the ex-spouse receiving the alimony does not include those alimony payments in her (or his) reported income and so does not pay taxes on it.
Why does this matter? Almost always, or perhaps always, the ex-spouse paying alimony has a higher income and is therefore, in a higher tax bracket than the ex-spouse receiving the alimony payments. Under the old law, the shifting of this income from one ex-spouse to another meant that the federal government was receiving less money in taxes since the ex-spouse with a lower income was paying taxes on that amount. In effect, it gave the paying spouse the ability to transfer some amount of money to the receiving ex-spouse tax-free. Under the new law, that financial benefit has been erased.
What’s the state of the law now? In Texas, the same law exists regarding spousal maintenance, which is monthly payments from one ex-spouse to another to help that ex meet her “minimum monthly needs.” This is a legal catch phrase in Texas divorce law that is determined on an individual basis. (Read my previous blog post about spousal maintenance and minimum reasonable needs.) There never was a tax-shifting component to these payments and there still isn’t. Now, the only real difference between spousal maintenance payments and alimony is that when someone fails to make his spousal maintenance payments, the legal remedy is a contempt action with the court, which can mean jail time. Divorcing couples in Texas can still agree to alimony, but now there is no tax-shifting component and, like always, the legal remedy when the paying party fails to make payments is to sue him in a breach of contract action. There is no change in how alimony provisions are enforced.
Whether to include spousal maintenance, alimony, or neither as part of your divorce can be a complicated analysis. It is important to have a divorce attorney and sometimes a financial expert help you make the decision of how to handle this in your divorce. Remember: You don’t know what you don’t know. So in a life event as big as divorce, make sure you have good advice from qualified professionals to guide you in your decisions.
Rhonda Cleaves is a divorce attorney in Plano, credentialed in collaborative divorce by Collaborative Divorce Texas. She represents clients throughout the DFW metroplex, including clients who live in Plano, Frisco, Allen, McKinney, Richardson, Carrollton, and Lewisville. You can schedule a consultation with her by calling (972) 403-0333.